Through the Looking Glass: Indirect Inference via Simple Equilibria

Laurent E. Calvet (1) , Veronika Czellar (1)

1 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

This paper proposes an indirect inference (Gourieroux, Monfort and Renault, 1993; Smith, 1993) estimation method for a large class of dynamic equilibrium models. Our approach is based on the observation that the econometric structure of these systems naturally generates auxiliary equilibria that can serve as building blocks for estimation. We use this insight to develop an accurate estimator for the long-run risk model of Bansal and Yaron (2004). We demonstrate the accuracy of our method by Monte Carlo simulation and estimate the long-run risk model on U.S. data. We also illustrate the good performance of the methodology on an asset pricing model with investor learning.

Keywords: Hidden Markov model; long-run risk; learning; value at risk; indirect inference; particle filters

Domains: Business administration

Laurent E. Calvet, Veronika Czellar. Through the Looking Glass: Indirect Inference via Simple Equilibria. 2014. ⟨hal-02058272⟩